Lots of employers don’t match. My husband’s doesn’t and my employer didn’t match for my similar 457 account (government job) . I assume that by positive you mean "worth more than I actually put into it " and yes, an employer match will keep your account that kind of positive for longer than it would have been without the match if there is a crash. But the balance is going to go up and down - your balance today is really meaningless if you are going to retire in 20 years.
The match is not the only important part - the reason my husband and I have accounts even without a match is the tax treatment. Lets say my husband and I each contributed $10K . That’s $20K we don’t pay tax on in the year we earned it - the taxes are deferred until later, when we expect to be in a lower bracket. Since we don’t pay the taxes now, contributing that $20K will decrease our take-home pay less than $15K , because I would pay over $5K in income taxes on that $20K (fed, state and local)
I see what you mean, but wouldn’t you be paying a shit ton of taxes when you are trying to retire then? How does it work when you go to retire? All the taxes hit your account like a bill or something?
Maybe this is why the two dudes in my family that retired had to go back to work. I can’t stress to you how freaking CHEAP these guys were. I learned how to rebuild a starter off a car because they wouldn’t pay for a rebuilt starter. They robbed brushes off of a dead car’s starter. They lived SUPER CHEAP, and still their “401k died”. Not “super cheap” as in no cable TV, super cheap as in no freaking air conditioning in the South.
Does the deferred taxes get taken out of the account when you notify the 401k people you are retiring?
Your account is never negative. (That happens when people buy on margin and other stuff your 401K doesn’t do.) Your balance may be lower than it was, but as people have mentioned in this thread, it does not matter unless you have to take money out, and is in fact a good thing since you get to buy stock cheaply.
The Schwab guy is lying to you. 401Ks have tax advantages, just buying stock does not. That means if you have spare money, do the 401K first, if you can.
If he is talking about buying stocks instead of funds, he is also wrong. While funds have costs, so does stock trading. The people who run the funds are connected to computers that track trends and can make trades in microseconds. Unless you want to monitor stocks for the entire trading day (and it appears you have better things to do) let them do it.
But for the most part it seems you work for a terrible company. No amount of market knowledge is going to fix that. I feel for you.
Which you don’t have to do until age 73 or so. I was just on the phone with my advisor about doing this very thing. Though taking some out earlier reduces the amount you have to start taking out at 73.
I do work for a terrible employer, but it didn’t start out that way.
I took this job because the company was owned by a person. I have good luck if there is a person at the top of the pyramid, especially if that person has some sort of idea how the business works.
What happened a lot in my industry is the guy that owns the business wants to retire. So what he does is run his business in such a way that makes his temporary numbers look freaking great, but they aren’t real. Then another company comes along and buys his company based on the bogus figures. They start running things and realize that the employees didn’t get raises, they were switched on a garbage insurance, they deferred all of the maintenance on their machines, whatever. The dirty truth gets discovered.
But this new business that owns your office isn’t interested in the normal 15% profit and needs it to now be 50%, because they have shareholders and they want to get paid as well. Now the business guts its benefits and hilarity ensues. People leave, and now I have to do three jobs instead of one, but for no extra pay.
Right now (literally) the CEO and CFO are on a conference call that they are making us watch. At this very moment they are patting themselves on the back on how profitable they have made things and how well the company is now doing, but the guy that shares my office is literally stuffing cans in a bag during the call trying to get to the bottle deposit place before they close so he can get his medication paid off for March. He has a week to pay it off or they won’t give him the next box of shots for April.
I don’t know what they are but they are 1200 bucks a month with insurance. If he skips them he ends up in the hospital. We went through that not too long ago.
Ouch. I hope you guys will be able to get out some day. And when you do no doubt the bosses will say the workers have no loyalty any more.
Bottom line first leads to disasters like Boeing also.
Think of it like a new job. Now your retirement account is giving you a paycheck. When you get your paycheck, you’ll need to pay taxes.
Can someone who’s retired tell us when you pay the taxes? Can it come out with the payment from the account or do you need to save up and make the payment yearly, before April 15?
If you have an account at Fidelity, then they should be able to identify your account by your social security number, at which point they will know that it’s a 401K account attached to your employer. What have they (Fidelity) been telling you so far?
If you know your employer isn’t going to provide a match, then you have some choices to make. Here’s a basic breakdown of what types of investment accounts you can put your money into:
If you have a traditional 401K or a traditional IRA (an IRA is a retirement account that you open on your own, and it’s not connected in any way with your employer), those are tax-deferred accounts. You don’t pay income tax now on the money you put into those accounts, but you do pay tax later on when you take money out. These withdrawals (which include your original deposits, plus any growth that’s happened in the years since) are taxed at income tax rates. If you withdraw $40,000 one year and have no other income, then according to this table, you’ll be paying somewhere between 10% and 12% income tax on that withdrawal.
If you have a Roth 401K or Roth IRA, then you make deposits with after-tax money. If it’s a Roth 401K, then your employer takes the deposit out of your paycheck, and your W-2 at the end of each year notes all of your Roth contributions as taxable income. If it’s a Roth IRA, then you take after-tax cash from your bank account and make your own deposit. Unlike traditional 401K/IRA accounts, you pay income tax now on the deposits, but you don’t pay any tax on the withdrawals during your retirement. So if you deposit $100,000 of after-tax money over the course of your career, and it grows to $200,000, then when you withdraw $40,000 one year, you’ve already paid income tax (during your earning years) on half of that withdrawal, and you won’t pay any tax on the other half.
401K and IRA accounts have penalties for early withdrawals. these types of accounts are intended to be set aside for retirement, the early-withdrawal penalties are a feature that helps a lot of people who might otherwise be tempted to tap into those accounts to buy a new car or have a nice weekend in Vegas. 401Ks also help employees because the deposits get taken from their paycheck before the employee ever sees it; for a lot of folks, it stings a lot less when you don’t have to write your own deposit check every month, and it also takes procrastination/forgetfullness out of the picture.
You can also take after-tax cash from your bank account and just put it in an ordinary investment, buying stocks or mutual funds through a brokerage. Stocks (and mutual funds that are composed at least partly of stocks) typically pay dividends a few times a year, and you can elect to either have those deposited to your bank account, or automatically reinvest (i.e. use the dividends to buy more shares of the stock/fund). Each year, you pay capital gains tax on the dividends that were paid out to you during that tax year. Right now the long-term capital gains tax rate is either 0%, 15% or 20%, depending on how much money you made that year (see table here). When you actually make a withdrawal from one of these accounts, the part of the money that you already paid taxes on doesn’t get taxed again - only the part that hasn’t been taxed yet gets taxed, and only at the capital gains tax rate. So the math simple, imagine you deposited a lump sum of $100,000 one day in an ordinary investment. To keep the math even simpler, imagine this mutual fund is a weird one that doesn’t pay any dividends - the only way it increases in value is when the share price goes up. Ten years later, the share price has doubled, and your fund is worth $200,000. You now withdraw $40,000 to live on. That withdrawal has $20,000 of your initial deposit in it that you paid income tax on already, and you don’t pay taxes on that part again. The remaining $20,000 of your withdrawal is realized capital gains that you pay capital gains tax on - and as you can see from this table, the capital gains tax rate for this amount of capital gains is 0%.
So which type of investment is best for you? It depends primarily on:
how much money you’re earning now (which affects your income tax rate right now);
how much money you expect to pull from your retirement accounts each year when you retire (which will affect your income tax in those years);
what you think the government will do to income tax rates and capital gains tax rates during the remainder of your life;
how much self-control you have to keep yourself from tapping into those accounts before you actually retire.
If you think you’ll be in a higher income tax bracket when you retire than you are now - either because you’re saving a huge fraction of your income these days, or because you predict the government is going to really turn the tax screws on us a decade or two from now - then you should pay your income tax now and put your savings in a Roth 401K/IRA, if those are accessible to you. Your company might not offer a Roth 401K option, and there are limits to how much you can deposit in an IRA each year (and if your income is high enough, then you can’t put any money in an IRA). If you can’t put (enough/any) money in a Roth 401K/IRA, then you’ll want to put your money in an ordinary investment - one where you deposit after-tax money, and pay capital gains tax later on the growth.
If you think you’ll be in a lower income tax bracket when you retire - either because you’re not saving much for retirement, or you predict the government won’t make significant changes to tax policy between now and then - then you’ll be fine in a traditional 401K/IRA.
If you have good self control and can keep yourself from tapping into retirement accounts early, and you know you’re not missing out on an employer match, and you have the discipline to reliably send out your own deposits on a regular basis, then you may prefer ordinary investments, since capital gains tax rates are lower than income tax rates. That is, if you believe the government won’t jack up capital gains tax rates in the future.
I just finished reading The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. It’s not about how to invest really, but more people’s relationship with and behavior toward money. Behavior is the key, and the hardest.
A small part of the book, but that exemplifies what the book is about, is the story of Ronald Read, who has a great first sentence on his wiki page: “Ronald James Read (October 23, 1921 – June 2, 2014) was an American philanthropist, investor, janitor, and gas station attendant.”
He died with $8million which he donated to charity. He did that on a modest salary by simply saving more than he earned. And conservatively investing his savings. And he did this over a long time which allowed the magic of compound interest to do its thing. That’s it. It’s pretty much the same thing Warren Buffet did, only on a smaller scale. Save more than you earn, invest early and wisely. You have to be disciplined to do this.
Even if the stock market crashes, your account shouldn’t go to zero. It might take a huge hit in value, but the only way it should get completely to zero is if you are investing in some individual stocks that become completely worthless. Or if there are some fees that somehow clobber the principal.
Very weird about the 401(k). HR’s job should include helping you get things set up, if at all possible. Given your distrust (well-earned!!) over that whole process, you may well be better off investing individually.
Doing that means you have basically unlimited investment options; 401(k) and similar plans typically have a more limited list of funds (I think mine has 10 or 15) that you can choose from.
The downside of doing it individually is a) no company matching, and b) lower contribution limits (7,000, or 8,000 if you are older). here’s nothing to stop you from saving more than that, of course, in regular investments (i.e. no tax deferral).
It sounds like there’s been a stunning lack of transparency on your employer’s part. Any retirement savings ought to be immediately sequestered from employer funds (there are horror stories), and ought to be held by an independent company - e.g. Fidelity, Vanguard, Schwab and so on.
I can tell you how it works in Canada: When you retire and start withdrawing your retirement money, the broker or bank will withold taxes at that time. Then you will get a T4A at tax time to declare your income from the retirement account. If you have deductions, you will get some of that money back, just like any other income where too much tax was withheld. I think it works the same way in the U.S.
There are three advantages to a tax-sheltered savings account:
The taxes are deferred until retirement meaning you can invest more money than you otherwise could with after-tax money.
Any gains in the account are deferred until retirement, so they compound cleanly.
You put the money in when you are in a higher tax bracket, and take it out when you are retired and presumably in a lower one and also get tax deductions for age and retirement status in some cases.
I steongly recommend you learn to manage your own retirement accounts and not let them be ‘professionally’ managed. In this era of low stock market returns and relatively low interest, it doesn’t take much in management fees to wipe out your gains.
I have a self-directed RRSP. My wife let hers be managed by Manulife through her employer. She isretiring, and closed out that account and discovered that it has returned NOTHING over the past 5 years, because all gains were eaten by management fees. My portfolio, which is mostly just index funds and ETFs, went up almost 15% over that period.
Wow, that is quite the shitty managed account. Astoundingly bad.
A basic Big Bank balanced fund has done much better than that over the past 5 years, even with their high management fees. As an example, the TD Bank Balanced A fund has a Management Expense Ratio (MER) of 2.23%. This is quite high! You could certainly could do better.
BUT: This fund, which is balanced and NOT high risk, has returned 6.95% PER YEAR when looking at the past 5 years. Even when looking at the past 3 years, (which includes the terrible 2022 when the market tanked), it has returned 4.84% PER YEAR.
If your portfolio only went up 15% in 5 years… that’s not good.
When I take money out of my IRA they take 10% withholding. I do it only once a year. I’m just starting withholding on my Social Security, since it is big enough to need to once I took it at 70. We do estimated payments if we think we need to.